At the outset of each new year, API takes stock of public expectations and analysis for every economy around the world and assesses their energy market implications.
While it may be no surprise that 2023 economic growth expectations have recently fallen, the current Bloomberg consensus average estimate is still for real GDP growth this year of 2.1% year on year. Official projections from the International Monetary Fund remain higher, and no major forecasting source projected a contraction this year per Bloomberg as of January 2023.
Importantly for oil markets, according to data on record since 1950, the world’s demand has historically risen every year in which the economy has grown. Consequently, it would be reasonable to expect the world would likely require more oil and other forms of energy in 2023, despite myriad uncertainties.
Currently, the U.S. EIA expects global oil growth of 1.1 million barrels per day (mb/d) this year. By comparison, the International Energy Agency (IEA) expects 2023 growth of 1.9 mb/d. The two estimates differ based on their economic expectations aw well as the extent to which they believe liquid fuels might be substituted for natural gas, which could remain globally scarce.
This brings us to a second point of importance to energy markets and policies: investments are needed to bring oil supplies that the world needs.
At API, we track publicly announced industry capital investments over time, as well as a backlog of projects currently under construction. Capital investment rose to $58 billion in the third quarter of 2022 from $41.1billion one year earlier, per Bloomberg and company financial reporting by the U.S. SEC. These are global companies, and the majority of capital is required for upstream oil and natural gas resource developments, or by global integrated companies that have large resource development requirements. The $58 billion in the third quarter of 2022 reflected a 41.1% year-on-year rise.
Not all of this represented a real spending increase, however, since price inflation for oil services escalated. For example, the U.S. Bureau of Labor Statistics (BLS) reported oil and natural gas extraction price inflation of 47% year-on-year for September 2022.
At the same time, EIA estimates suggest that oil rig productivity in the field fell by an average of over 20% year on year as of November 2022, compared with November 2021. At least part of the reduction has been due to fewer previously drilled but uncompleted wells contributing to the overall production estimates. As a result, greater effort is required to sustain and grow domestic production.
Compared with its highest level of 13.0 mb/d in November 2019, U.S. crude oil production remained flat over the latter half of 2022 and was 12.1 mb/d at year-end per EIA.
Oil investments and drilling have risen, but more is needed to help increase production in light of cost escalation, lower rig productivity and reduced contributions from previously drilled but uncompleted wells.
With oil demand having outpaced production, U.S. Strategic Petroleum Reserve (SPR) releases of over 206 million barrels (0.6 mb/d), or nearly one-third of SPR inventories last year, have left the SPR at its lowest level since 1983. At the same time, U.S. petroleum consumption in 2022 was one-third higher than it was in 1983 per API.
In early January, the U.S. DOE rejected initial bids to resupply SPR inventories, and a question for policymakers is whether the current SPR level is adequate given the fundamentals that we have discussed.
Last but not least, API’s proprietary economic indicator, the Distillate Economic IndicatorTM, has continued to suggest that U.S. industrial production and broader economic activities have grown.
All in all, the key implication is that even slow economic growth appears likely to require more energy next year, at a time when the market remains subject to global uncertainties.
This may not provide the same degree of energy abundance and security that American consumers have come to expect throughout the shale revolution over the past decade, which underscores why cogent and responsible energy policies supporting broader production and supporting infrastructure remain essential.
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